Settlement discount

I am surprised that your book does not show the workings!! The cost of the discount is 2% x 12M x 0.5 = 120,000 per year. The current collection period is 90 days (if we assume 30 days in a month). The new average collection period is (10 + 60) / 2 = 35 days (again, assuming 30 days in a month). So a saving of 90 - 35 = 55 days. The interest saving is therefore 55/360 x 20% x 12M = 366,667 Giving a net saving of 366,667 - 120,000 = 246,667 I don't know why the answer given is different - maybe they have assumed different number of days in months or years. However, in the real exam, unless you were given more detail then my answer would get full marks (and usually it would only be asked for to the nearest thousand anyway :-) )

Two things First (and I know that you are not asking this :-) ) the reason their answer is slightly different from mine is that they assume 365 days in a year. However in the exam they will make it clear what to assume. (They show their workings differently, but that does not matter at all). Secondly, in relation to what you have actually asked, there are arguments for and against subtracting the discount from the receivables. For that reason, the examiner has always accepted either way. (The difference in the final result is only ever fairly small, which is why he usually asks for the answer to the nearest thousand)